Unit 4Question 1The production possibility frontier of an economy is asshown in Figure 1.(a) () If the economy produces 15 units of manufoctured goods,whot is the maximum number of non-manufactured goodsit can produce? (in) How many manufoctured goods could itproduce if production of non-manufoctured goods was 50 units?(b) The economy is currently operating at point C What is theopportunity cost of increasing production of non-manufacturedgoods by (1) 15 units; (1) 20 units?(c) The econory is at D. Whot is the marginal cost of increasingproduction of non-manufactured goods to the point () C; (i) B? Thanks in advance! Unit 4Question 1The production possibility frontier of an economy is asshown in Figure 1.(a) (i) If the economy produces 15 units of manufactured goods,what is the maximum number of non-manufactured goodsit can produce? (ii) How many manufactured goods could itproduce if production of non-manufactured goods was 50 units?(b) The economy is currently operating at point C. What is theopportunity cost of increasing production of non-manufacturedgoods by (i) 15 units; (ii) 20 units?(c) The economy is at D. What is the marginal cost of increasingproduction of non-manufactured goods to the point (i) C; (ii) B?change. At the point C in Figure 1, the economy could producemore manufactured goods, but at the cost of giving up non-manufactured goods. For example, the marginal cost of fivemore units of manufactured goods would be 10 fewer units ofnon-manufactured goods. This is shown by the movement fromC to D along the boundary.Economic growth or declineThe economy cannot produce at any point outside its existingPPF. This is because the PPF shows the maximum potentialoutput of an economy. In Figure 1, for example, the economycannot produce at the point G. However, the economy mightbe able to move to the right of its PPF in the future if there iseconomic growth. An increase in the productive potential ofan economy is shown by a shift outwards of the PPF. InFigure 2 economic growth pushes the PPF from PP to QQ.allowing the economy to increase its maximum level ofproduction, say, from A to B.Figure 2Economic growthAn increase in the quantity or quality of the inputs to theproduction process means that an economy has increased itsproductive potential. This is shown by a shift to the right of theproduction possibility frontier from PP to QQ. It would enable theeconomy o move production, for instance, from point A to point B.18Civilianproductionwww0QPABMilitary productionGrowth in the economy can happen if:the quantity of resources available for production increases;for instance there might be an increase in the number ofworkers in the economy, or new factories and offices mightbe built;there is an increase in the quality of resources; education willmake workers more productive whilst technical progress willallow machines and production processes to produce morewith the same amount of resources.Production possibility frontiers can shift inwards as well asoutwards. The productive potential of an economy can fall. Forexample, war can destroy economic infrastructure. A rapid fallin the number of workers in a population can reduce potentialoutput. Some environmentalists predict that global warming willdevastate world agriculture and this will have a knock-on effecton all production. Global warming could therefore lead to a shiftinwards of the world's PPF.Many economies experience high levels of unemployment ofworkers. Factories and machines may lie idle when this occurs.Production then occurs within the boundary and not on theboundary such as at the point F in Figure 1. If resources becamefully employed, the economy could move from inside theboundary to a point on the boundary. In Figure 1, this wouldmean a move from the point F to, say, D or E.Consumption vs investmentThere is a potential conflict between consuming now andeconomic growth fuelled by investment. If an economy producesan extra £10 billion worth of restaurant meals for consumers,then they are better off today. If, however, that £10 billion hadbeen spent on new factories, offices or new machinery, theproductive potential of the economy is likely to increase. As aresult, consumers may then be better off in the future.Figure 3Consumption vs investmentCountry B, which initially devotes more resources to investment(the production of capital goods) has a higher growth rate thanCountry A which initially produces more consumer goods.Eventually, Country B produces more capital and consumer goodsthan Country A because of higher growth.ConsumergoodsRQP01112DPQ RCapital goods Starter activityYour Economics A level group decided to raise money for charity. Ittook each person a day to take part and you raised £500. You cangive the money to two charities. Which two charities would youchose? How much would you give to each? If you give £100 moreto one charity, how much less to do you give to the other? Whatwould have been the likely outcome if half the group had givenexcuses and not taken part in the fund-raising activity? Answers tothese questions illustrate opportunity cost, choice and productionpossibility frontiers.The problem of scarcityOver a period of time, resources are scarce and therefore only afinite amount can be produced. For example, an economy mighthave enough resources at its disposal to be able to produce30 units of manufactured goods and 30 units ofnon-manufactured goods. If it were now to produce moremanufactured goods, it would have to give up some of itsproduction of non-manufactured items. This is because theproduction of a manufactured item has an opportunitycost in this case the production of non-manufactured item.The more manufactured goods that are produced, the lessnon-manufactured goods can be produced.This can be shown in Figure 1. The curved line is called theproduction possibility frontier (PPF) - other names for it includeproduction possibility curve or boundary, and transformationcurve. The PPF shows the different combinations of economicgoods which an economy is able to produce if all resources inthe economy are fully and efficiently employed. The economytherefore could be:at the point C on its PPF, producing 30 units of manufacturedgoods and 30 units of non-manufactured goods;at the point D, producing 35 units of manufactured goodsand 20 units of non-manufactured goods;at the point A, devoting all of its resources to the productionof non-manufactured goods;at the points B or E or anywhere else along the line.Production cannot take place to the right of the PPF, suchas at the point G. This is because the PPF shows the maximumoutput of the economy. It can operate within the boundary,Figure 1The production possibility frontierABCDE is a production possibility frontier. It shows the differentcombinations of goods which can be produced if all resources arefully and efficiently utilised. The economy can produce at any pointon the line. It cannot produce at G because the PPF shows themaximum that can be produced. It can produce within the PPF,such as at F, but less will be produced than the maximum possible.Non-manufactured goods5040302010010BTIF3020Manufactured goodsBCDE40for example at F, but the economy is producing less than itsmaximum.Opportunity costThe production possibility frontier illustrates clearly the principleof opportunity cost. Assume that the economy is producingat the point C in Figure 1 and it is desired to move to thepoint D. This means that the output of manufactured goods willincrease from 30 to 35 units. However, the opportunity costof that (i.e. what has to be given up because of that choice) isthe lost output of non-manufactured goods, falling from 30 to20 units. The opportunity cost at C of increasing manufacturingproduction by five units is 10 units of non-manufactured goods.Another way of expressing this is to use the concept ofthe margin. In economics, the margin is a point of possible17

The Production Possibilities Frontier (PPF) illustrates all the possible output combinations of two…

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ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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